Much Higher Dow Simple to Understand …

Ever since the March 2009 crash low in the U.S. equity markets, I’ve maintained my view that the Dow Industrials and other broad market indices were entering a new bull market. That forecast has been spot on.

One of the tools I used to come to that conclusion in 2009 was the ratio of the Dow Industrials to the price of gold.

I wrote extensively about it in several issues of my Real Wealth Report. I also reported on it several times in other pieces I wrote. Today I want to update the analysis for you.

First, a refresher. At the peak of the Dow/gold ratio in 1999, the Dow Industrials would have purchased just over 50 ounces of gold. That’s because the Dow was at a high in real, inflation-adjusted terms, while gold was at its bottom at the $255 to $275 level.

During the financial crisis of 2007-09, as equities plunged and gold rallied (since its bottom in 1999), the ratio collapsed all the way down to the 6 to 7 level.

In other words, in terms of gold — what I like to call “honest money” — at its March 9 low the Dow Industrials had lost more than 87 percent of the entire equity bull market from 1980 to 1999.

Since then, stocks have vastly outperformed gold, as stocks have moved higher, and gold lower.

As a result, the ratio of the Dow Industrials to gold has widened back out, to about a level of 15 today.

Put another way, had you bought the Dow Industrials in 2009 at the bottom and sold gold, you would have made 300 percent on your money as the Dow soared and gold plunged (after 2011).

So what does this all mean? And what does it hold for the future for the Dow?

The Dow is beginning to reflect how much value the dollar lost between 2000 and 2011.

I’ll answer those questions now. But I urge you to put your thinking cap on, because the analysis of the Dow/gold ratio is not easy to grasp, yet it’s critically important to understanding the future.

FIRST, the collapse in the Dow-to-gold ratio was not caused simply by a crash in equity prices.It was also due to a crash in the value of the dollar, as reflected in the soaring value of gold from the year 2000 to 2011.

SECOND, the Dow is now beginning to adjust — to reflect how much value the dollar lost between 2000 and 2011.

This adjusting of equities is perfectly normal. All asset classes eventually recalibrate their price levels to the new reality of the purchasing power of the underlying currency, which in this case, is the dollar, which in turn, is nowhere near what it was worth back in the year 2000.

A simple theoretical exercise here will show you how the Dow will adjust.

For the Dow/gold ratio to climb back to the 50 level — where it was when stocks peaked in 2000 and gold bottomed …

The Dow would have to explode higher to the 59,350 level, assuming gold’s current price of roughly $1,187.

Naturally, the price of gold is not going to remain at $1,187. It will probably fall back to as low as $900 before it bottoms, one of my targets for the end of gold’s bear market.

So let’s say gold does indeed fall to $900. Then a 50-to-1 ratio for Dow/gold, with gold at $900, would still imply the Dow eventually hitting the 45,000 level.

Naturally, projections like that assume all else remains equal. In other words, the underlying economy, unemployment, international relations, the global economy and a host of other variables.

So those projections are not realistic.

But what is realistic is this: It would not be unusual at all, in fact, it would be perfectly normal if the Dow/gold ratio were to regain half of what it lost since the year 2000 …

And move back to the 25 level.

Then, all we need to do is pop in various prices for gold to get various measurement of how high the Dow can go. Assuming gold does bottom at $900 and then begins its next bull market, we can then come up with a grid that looks something like this:

Put any number in the first column for gold, and you can come up with any slew of other numbers for the Dow.

And on the flip side, at a Dow/gold ratio of 25 — a perfectly real world and normal retracement of 50 percent of what it lost since 2000 …

The Dow could only fall back to 12,500 if gold were to fall back to $500.

The Dow could only fall back to 10,000 if gold were to fall back to $400.

The Dow could only fall back to the March 2009 low of roughly 6,500 if gold fell to $260!

And given the high probability that gold won’t move any lower than $900 and will then enter a new bull market …

It’s certainly not hard to see why the Dow also has huge upside potential going forward, and that its downside is limited to mere technical corrections!

Factor in the war cycles and other geo-political forces that are driving capital to the U.S. stock markets …

And you can easily see why I remain very bullish long term on the U.S. stock markets and why my long-term target of Dow 31,000 may actually end up conservative.

Lastly, an important point: As you can tell from this exercise, the monetary system has changed dramatically.

So much so that it’s also inevitable that at some point in the not-too-distant future, the dollar reserve based system will have to change.

Even as the dollar now rallies, the system is so broken and so out of date with the rest of the world and emerging economies and Asia, we will eventually need a new reserve system with a globally neutral reserve currency.

Best wishes,

Larry

Larry Edelson, one of the world’s foremost experts on gold and precious metals, is the editor of Real Wealth Report and Supercycle Trader.

Larry has called the ups and downs in the gold market time and again. As a result, he is often called upon by the media for his investing views. Larry has been featured on Bloomberg, Reuters and CNBC as well as The New York Times and New York Sun.

{34 comments }

Rob,.Wednesday, November 19, 2014 at 8:18 am

Ever since the March 2009 crash low in the U.S. equity markets, I’ve maintained my view that the Dow Industrials and other broad market indices were entering a new bull market. That forecast has been spot on. Larry you are a complete liar and a total JOKE

had you bought the Dow Industrials in 2009 at the bottom and sold gold, you would have made 300 percent on your money as the Dow soared and gold plunged (after 2011).

BUT,. anyone who followed Larry’s advice at the time would have stayed OUT the nyse and not made a bean,. anyone who followed Larry’s advice would have MISSED out most of the bull market,.

Total Rubbish,.

HeidiWednesday, November 19, 2014 at 8:40 pm

Rob – totally agree . He was bullish on gold and bearish on the Dow . By now he forgot but his subscribers didn’t .

AidanSaturday, November 22, 2014 at 3:29 am

Agreed. This is a total fabrication. Larry has was calling for a ‘correction’ for many many years. I looked at a wealth report randomly from 2010 to see how accurately his projections were and he was asking that everyone get out of US equities…

We have missed a real boom in the market.

Poor advice.

randyWednesday, November 19, 2014 at 8:32 am

this guy is getting into jason hommel nutsy monkey (for a character of jimmy olsen comics circa 1960) territory now. what’s up with edelson and the movie “the forecaster”??

JimWednesday, November 19, 2014 at 8:41 am

Larry must take lessons from Washington politicians….misleading people is good..follow him and you will lose. He nothing but a Gold Hustler. I have made more in the Dow by going against his recommendations.

JonWednesday, November 19, 2014 at 8:43 am

Ever since the March 2009 crash low in the U.S. equity markets, I’ve maintained my view that the Dow Industrials and other broad market indices were entering a new bull market. That forecast has been spot on.

Yet all I recommended on equities since then was triple leveraged shorts like spxu tza and faz
Ha u chump u haven’t recommended one stock indexing since 09. And even now ur current last index recommendation was that triple leverage s&p shorts u said to get right at the bottom of the October corrections

AggroWednesday, November 19, 2014 at 8:47 am

This guy’s a Martin Armstrong wannabe

Everything he says has already been said by Armstrong

HeidiWednesday, November 19, 2014 at 8:43 pm

There were times last year when I wrote Larry to check what Armstrong wrote – Larry still went against it but now he believes it after he lost how many subscribers ?
Too bad .

MannyWednesday, November 19, 2014 at 8:57 am

“We are so close to a bottom in precious metals, I can taste it” – Larry Edelson (6/7/13)

zzzzzWednesday, November 19, 2014 at 9:16 am

But…but….but….you and this whole site were so sure there would be a massive selloff early this year. We’re still waiting. You sat out the whole move up. You say you predicted everything correctly yet, you didn’t. You give advice except that it’s wrong. Remind us again what you credentials actually are – this time no b.s.

Doug HutchinsWednesday, November 19, 2014 at 10:39 am

Where is the CORRECTION we have been waiting for????????? We missed the move up waiting for this correction that seems like it is NEVER GOING TO HAPPEN!!!!!!!!!!!!!

HeidiWednesday, November 19, 2014 at 8:46 pm

Doug … you are right – it’s never gone happen .
A saying from Armstrong …..” What doesn’t go down – goes up !!!!

John AWednesday, November 19, 2014 at 11:01 am

Not true at all. I was a subscriber back then. He did call the 2009 bottom BUT after that when the DOW went to just below 11,000 he kept saying it would fall to below 9,000. Over and over month after month for over a year he kept saying it would crash to below 9,000. Can’t believe he’s now saying he was bullish the whole time.

robThursday, November 20, 2014 at 8:34 am

in fact he went as far as to say stay out of any nyse at all costs and anything usd related,. suggesting safeguarding any cash by buying CNY and going long and short at same time on tips or some bond funds,. funny guy,.

MannyWednesday, November 19, 2014 at 12:12 pm

Oh Larry. Keep tap dancing. And keep getting them checks ;)

FollyWednesday, November 19, 2014 at 4:36 pm

Larry, what a lot of babble. There is always a ratio between gold and the dow, because we are comparing two numbers. This may be interesting historically, but predicts nothing.

I’m in cognitive dissonance. How can Larry, being so wrong, be giving a review about Armstrong who has not been wrong often at all?

russThursday, November 20, 2014 at 6:23 pm

Quote From Larry 11/7/2010:
THIS is why I’ve been urging you all along to diversify in all five major asset classes. With the Fed now printing money like there’s no tomorrow — and with the $600 billion it says it’s printing only the tip of the iceberg needed to get the U.S. economy going again …

We’re looking at massive asset re-inflation across the board. World stocks … gold and the other precious metals … bonds … and of course commodities — especially food — are ALL set to deliver huge gains in the months ahead!

tedFriday, November 21, 2014 at 10:53 am

If you are not in mining stocks right now, you need to be. Other sources say that the upswing (not straight up)will happen through the first of the year, then retrace to mid 2015. I have options that are up 50%. Good luck.

HeidiSaturday, November 22, 2014 at 6:21 pm

ted…you will be wrong ..watch January 20`15 …all down !!

AidanSaturday, November 22, 2014 at 3:41 am

Ever since the March 2009 crash low in the U.S. equity markets, I’ve maintained my view that the Dow Industrials and other broad market indices were entering a new bull market. That forecast has been spot on.

THIS IS A LIE AND ANYONE WHO HAS 5 MINUTES CAN READ YOUR HISTORICAL POSTS.

Sad to see this. You are making yourself look very foolish and worse making your subscribers feel foolish.

This has really shaken my confidence in you.

Admittedly I am only really following your gold recommendations and they have been flaky at best. You have said 100% new lows below $1000… I cannot see how you can guarantee this or where that will come from.

Anxious.

HeidiSaturday, November 22, 2014 at 6:20 pm

Adian ,,,the $ 1000 gold will come as per Armstrong . It just takes longer then most expect . Late 2015 or early 2016 .

RECSaturday, November 22, 2014 at 9:14 am

Larry, If you throw enough darts at a dart board eventually you will hit the bulls eye. Any one can do that. You’re full of shiest.

edSaturday, November 22, 2014 at 11:48 am

Larry, you are suggesting a multiple of 25 for DOW/Gold ratio, yet you also state gold at $5000 in 2017-2018 due to cycles of war. That would suggest the Dow at $5000 times 25 =625,000… not 31,000 as you suggest…. what did I miss calculate?

edSaturday, November 22, 2014 at 11:51 am

Typo should be 125,000 not 625,000

HeidiSaturday, November 22, 2014 at 6:17 pm

ed …I don’t understand Larry at all saying gold goes up because of war . Larry should know better because this is so wrong . And NO gold won’t be at $ 5000 by 2017 ./ 2018
Larry – read Martin Armstrong before you are misleading your reader’s again !!

tomoSaturday, November 22, 2014 at 7:45 pm

more and more wars will feed inflation which will cause gold to rise…….does it not?

rewtrSunday, November 23, 2014 at 1:38 am

Heidi, you’ve officially become a troll on this forum.

RECSaturday, November 22, 2014 at 5:25 pm

ZZZ—– even a parrot makes mistakes LOL

DR. Stephen WeiseSaturday, November 22, 2014 at 8:49 pm

A move back to the 25 level…. ? Where did all this wisdom suddenly come from?
In July 2014 , Larry issued 3 Trade alerts to buy Gold. All of his recommendations were a disaster (JNUG) being the worst. Investors, trusting his research and the Weiss name ,lost
fortunes. We do not trust any of his forecasts, anymore.
It might take years to recover from this type of “expertise”.
It seems, that all this research is geared to accomplish, is “sell” a service, while in reality, nobody truly can predict the future.
Sorry, Larry, we know you probably meant well, but maybe you need to be a lot more conservative in any future predictions.

randyMonday, November 24, 2014 at 6:22 pm

is that edelson with martin armstrong on the steps of the theater at the second screening of the forecaster in amsterdam???